Will the Fed decrease the supply of currency for trade?

A review of the minutes from the Federal Open Market Committee meeting last month left me with the impression that the Federal Reserve will be ready to raise its overnight rate on interbank loans (the fed funds rate) in June of this year versus waiting until 2023. Board members and other FOMC participants see a strong economic outlook for the US along with higher inflation and tighter labor markets. While the “taper” word has for the most part gone the way of the other t-word, “transitory”, both concepts are still integral to Federal Reserve monetary policy over the next year.

By the middle of this month, the Federal Reserve is expected to purchase $40 billion of Treasury securities and $20 billion of agency mortgage-backed securities in part to maintain a smooth transition to a run-off of its balance sheet. The FOMC made clear in its minutes that the fed funds rate was still its primary monetary policy tool for achieving full employment and stable prices. The fed funds rate provides the Federal Reserve with more outcome certainty as opposed to additions to or subtraction from its balance sheet.

The FOMC also noted that during the period between its last two meetings, there were no attempts at intervening in the foreign currency markets as part of any dollar-support policy.

Touching on currency supply for a minute, the fourth quarter of 2021 saw the supply of US currency in circulation increase by 1.48% while the dollar index increased by 1.97%. I raise this merely as an interesting point given that an increase of currency in this instance may have been accompanied by a greater increase in demand by foreign and domestic customers.

In my opinion, there should be no surprise about a decrease in currency supply over the next twelve months. The fed funds rate will increase likely along with an increase in the amount of cash member banks are required to keep on reserve with the Fed. Less money in the system will lead to increases in interest rates. Increases may likely lead to increased yields making US bonds attractive.

People interested in retail forex trade should be mindful of brokers not on the up and up. Volatility and the size of the retail market is like blood in the water for less than scrupulous brokers selling you a pipe dream. Make the new year a great one.

Alton Drew

6.01.2022

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.